Lanolin is not an oil and not a true fat. It is a wax ester mixture — the grease sheep secrete to keep rain out of their wool — and its structure is closer to the natural lipids in human skin surface than most plant butters are.
Two properties make it useful. First, it is strongly occlusive: a film of lanolin dramatically slows water evaporating out of the skin, which is what lets a split, dehydrated crack in the lip or nipple actually close. Second, it is emulsifying — lanolin can hold several times its own weight in water. That means it does not slide off damp or weeping skin the way a pure grease does, and it can help keep a healing crack moist rather than scabbed over. This is why it beats plain petrolatum in the two places it is famous for.
It has no active pharmacology. It does not kill bacteria, reduce inflammation or speed healing directly. It creates the moist environment in which skin heals faster on its own.
Most people use lanolin without any trouble. The one side effect that genuinely matters is allergy.
Do not use it if you have a known lanolin or wool alcohol allergy. This is the one hard rule. It appears on ingredient lists under several names — lanolin, lanolin alcohol, wool alcohols, wool wax, Amerchol, Eucerit — and it is present in a great many ordinary creams and ointments, so people with the allergy have to read labels carefully.
Be cautious if you have long-standing stasis dermatitis or a chronic leg ulcer. Skin that has been inflamed for years becomes sensitized to topical ingredients far more readily, and lanolin allergy is meaningfully more common in this group. Many wound clinics avoid it for that reason.
Skip it on acne-prone facial skin. It is heavy and it clogs.
Do not use it on wounds you suspect are infected.
On the allergy question generally. Lanolin has an outsized reputation as an allergen, built partly on older, cruder material. In people with normal skin, reactions to modern purified lanolin are uncommon. In people with damaged skin who apply it repeatedly over months, they are much less uncommon. Both statements are true, and which one applies depends on which group you are in.
Breastfeeding. Purified lanolin is the standard recommendation and does not need to be wiped off before feeding. If your baby develops a rash around the mouth, stop and change products.
Vegans may want to know it is an animal product, though the sheep are shorn rather than harmed.